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  5. CEO Pay, Performance and Reputation
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CEO Pay, Performance and Reputation

Paper Session

Tuesday, Jan. 5, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: Association of Financial Economists & American Finance Association
  • Chair: Kose John, New York University

Uncovering the Hidden Effort Problem

Azi Ben-Rephael
,
Rutgers University
Bruce Carlin
,
University of California-Los Angeles
Zhi Da
,
University of Notre Dame
Ryan Israelsen
,
Michigan State University

Abstract

We use machine learning to analyze minute-by-minute Bloomberg login data and study how the effort provision of top executives in public corporations affects firm value. While executives likely spend most of their time doing other activities, Bloomberg usage data allows us to characterize their work habits. We document a positive effect of effort on unexpected earnings, cumulative abnormal returns following firm earnings announcements, and credit default swap spreads. We form long-short, calendar-time effort portfolios and show that they earn significant average daily returns. Finally, we revisit several agency issues that have received attention in the prior academic literature on executive compensation.

Intermediated Asymmetric Information, Compensation, and Career Prospects

Ron Kaniel
,
University of Rochester
Dmitry Orlov
,
University of Rochester

Abstract

Adverse selection harms workers, but benefits firms able to identify talent. An informed
intermediary expropriates its agents' ability by threatening to fire and expose them to
undervaluation of their skill. An agent's track record gradually reduces the intermediary's
information advantage. We show that in response, the intermediary starts churning
well-performing agents she knows to be less skilled. Despite leading to an accelerated
reduction in information advantage, such selectivity boosts profits as retained agents
accept below-reservation wages to build a reputation faster. Agents prefer starting their
careers working for an intermediary, as benefits from building reputation faster more
than offsets expropriation costs. We derive implications of this mechanism for pay-for performance
sensitivity, bonuses, and turnover. Our analysis applies to professions where
talent is essential, and performance is publicly observable, such as asset management,
legal partnerships, and accounting firms.

How Executive Compensation Changes In Response to Personal Income Tax Shocks (Who Pays the CEO’s Income Taxes?)

Benjamin Bennett
,
Tulane University
Jeff Coles
,
University of Utah
Zexi Wang
,
Lancaster University

Abstract

Using staggered personal income tax changes across US states, we study the effects of taxes on executive compensation. After a tax rate increase, pay of CEOs increases within two years by more than the increased tax liability. The effect on pay is stronger in more profitable industries. The higher tax rate appears to motivate CEOs to sell firm stock for liquidity. Boards respond by increasing cash pay to replace liquidity and stock pay to replenish CEO incentives. The effect of personal income tax on compensation is asymmetric: CEOs do not experience pay cuts following tax cuts.

Governance, Reputation, Crises and Recovery: Theory and Experiment

Thomas H. Noe
,
University of Oxford
Michael J. Rebello
,
University of Texas-Dallas
Thomas A. Rietz
,
University of Iowa

Abstract

We examine the interaction of firm governance with reputation, when reputation damage can be repaired through organizational reform. In a rational-choice framework our model explains how the option to mitigate reputation crises through reform affects firm reputation. The model produces two key conclusions: (a) Although, ex post, reputation repair through reform can increase firm value, ex ante, the option to repair reputation dilutes the incentive to maintain reputation. (b) Separating ownership and control by delegating management to professionals can ameliorate this dilution. An experimental implementation of the model supports these conclusions and shows they are robust to behavioral deviations from rational-choice behavior.
Discussant(s)
David Yermack
,
New York University
Andrey Malenko
,
University of Michigan
Carola Frydman
,
Northwestern University
Vojislav Maksimovic
,
University of Maryland
JEL Classifications
  • G3 - Corporate Finance and Governance
  • J3 - Wages, Compensation, and Labor Costs